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Washington - Lawmakers on Thursday reached a tentative deal
to fund an array of government agencies through September 30 and avert shutting
down many of Washington's operations starting this weekend.

Democratic Senator Daniel Inouye, one of the chief
negotiators on the massive spending bill, told reporters the deal had been
struck and the full Senate could vote on the measure as early as Friday.

The House of Representatives is expected to vote on Friday,
a Republican aide said.

Current funding for agencies ranging from the Defense
Department and Homeland Security to the Environmental Protection Agency expires
at midnight on Friday.

Meanwhile, work on a separate but equally important deal to
extend a payroll tax cut and long-term unemployment benefits continued in
Congress. Negotiations were also aimed at preventing a pay cut for doctors
treating elderly patients under the Medicare healthcare program.

A senior Senate Democratic aide said that if a quick
agreement cannot be reached on this measure, negotiators could turn to a
two-month extension instead of the year-long one they prefer. The two months
would ensure that workers see no drop in their pay checks starting on January 1
and it would allow Congress more time to try working out a longer-term deal.

The stumbling block on the year-long measure centered on how
to pay the $120bn cost of continuing a 4.2% payroll tax that is scheduled to
rise to 6.2% for workers on January 1 without congressional action, the aide
said.

Earlier on Thursday, as congressional negotiators hurriedly
searched for compromises, Obama warned Congress not to leave for a holiday
break without finishing its business.

"Congress should not and cannot go on vacation before
they have made sure that working families aren't seeing their taxes go up by $1
000 and those who are out there looking for work don't see their unemployment
insurance expire," Obama said.

Party leaders likely fear a backlash from angry voters who
already have lost confidence in Congress's ability to pass even the most basic
legislation and will get a chance to render their verdict in the 2012
presidential and congressional elections.

Any deals brokered will have to be approved by the full
Senate and House. That is a particular concern for House Speaker John Boehner,
whose Republican caucus includes conservative Tea Party-aligned lawmakers
unafraid to buck his leadership when they think he is compromising on
conservative principles.

Republican Representative Joe Walsh told Reuters that a
nearly $1 trillion bill to fund the government through September 2012 would be
difficult to support because of its price tag.

If lawmakers nail down the spending and tax measures, they
would be able to wrap up work for the year by this weekend or early next week.

Negotiations on the payroll tax cut extension picked up pace
after Democrats late on Wednesday dropped their demand that it be paid for with
a surtax on millionaires, which Republicans staunchly opposed.

The payroll tax cut would give 160 million Americans about
$1 000 a year in additional spending power. The White House and a number of
economists say it would boost the country's fragile economic recovery, although
many Republicans question that.

On the spending bill, there were some major differences
between Democrats and Republicans over policy initiatives backed by federal
funds.

Republicans agreed to drop two provisions that would have
restricted families living in the United States from traveling to Cuba or
transferring money to relatives there, a Republican aide said.

The progress on Capitol Hill on Thursday raised hopes that
Congress would avoid the first government shutdown since late 1995 and early
1996.

Earlier in the day, Senate Republican leader Mitch McConnell
said he was "confident and optimistic we'll be able to resolve both
(bills) on a bipartisan basis."

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